Question

Exporting, Licensing, or FDI

A firm has three basic choices if it wants to sell its products in a foreign market—exporting, licensing, and foreign direct investment (FDI). The choice of the best option depends on characteristics of the product, the processes used to make these products, the control a firm needs to exercise over operations, and how the know-how of the firm might be protected. The best option is a strategic choice the international business manager must make, considering the interplay among these factors.

Internalization theories explore the limitations of exporting and licensing from both explanatory and business perspectives. These theories identify with some precision how the relative profitability of foreign direct investment, exporting, and licensing vary with circumstances. Other theories help explain the direction of FDI. The internalization theories help explain why firms prefer FDI to licensing or exporting.

Read the case below and answer the questions that follow.

Your firm manufactures a range of household goods and appliances. Over the years, your firm has developed proprietary processes, using environmentally-friendly chemicals that have given your firm a leadership position for "green" customers. Your products are competitively priced. The appliances and products you manufacture tend to be bulky and a bit heavy for their size.

You are interested in exploring international business options. You need to decide whether exporting, licensing, or foreign direct investment strategies would be the most appropriate for your firm. You want to maintain your competitive advantages, so you consider different strategic options by answering the questions below.

1. The effect of bulky or heavy products on transportation costs can make _______ an inappropriate strategy.

- Exporting

- Foreign Direct Investment

- Licensing

2. If your proprietary know-how of “green” processes is difficult to transfer to other firms, the most effective approach would be _____ .

- Exporting or Foreign Direct Investment

- Licensing or Exporting

- Foreign Direct Investment or Licensing

3. If your household goods can be efficiently produced through economies of scale, it would be a good idea to use a(n) _______ strategy.

- Exporting

- Licensing

- Foreign Direct Investment

4. If a firm's know-how, skills, and capabilities can be protected by contract, and if tight control over foreign operations is not vital to remain competitive, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be _________ .

- Foreign Direct Investment

- Exporting

- Licensing

5. If the firm is facing the threat of trade barriers such as high import tariffs or quotas and the firm has proprietary technology, the firm should consider ______.

- Licensing

- Foreign Direct Investment

- Exporting

Answer 1

Question 1

When the products are bulky or heavy then this results in substantial transportation cost in case the goods are exported to foriegn countries. This will make the products expensive in foriegn countries and intention of expanding into foriegn market will not provide favorable results.

Thus,

The effect of bulky or heavy products on transporattion costs can make Exporting an in appropriate strategy.

Hence, the correct answer is the option (a) [Exporting].

Question 2

When a firm finds it difficult to transfer its technology to other firm in foriegn market then it cannot go for licensing arrangements. In such scenario, it has to adopt either export or FDI strategy.

Thus,

The correct answer is the option (a) [Exporting or Foreign Direct Investment].

Question 3

If a firm wants to take advantage of economies of scale to undertake efficient production then it will undertake production at domestic location to reap benefit of economies of scale and then export the product.

Thus,

The correct answer is the option (a) [Exporting]

Question 4

When a firm can protect its technical know how through contract and can also has tight control over the foriegn operations and tariff or transportation cost are high then firm would be induced to choose licensing arrangment. This will enable the firm to produce domestically at foriegn location.

Thus,

The correct answer is the option (c) [Licensing].

Question 5

When firm faces threat of trade barriers and also has technology that has to be kept secret then it will establish its own manufacturing units in the foriegn market to expand in such foriegn market. This will help it from threat of trade barriers but also help it to protect its technology.

Thus,

The correct answer is the option (b) [Foreign Direct Investment].